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US economy income of the rich = capital income income of the poor = wage income Population quantiles Source: Piketty, Saez (2003), Income inequality in the United States, 1913–1998, Quarterly Journal of Economics, February, issue 1

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US economy Income of the rich = mainly wage income Population quantiles

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A different story: France (1) Piketty (2005), Top income shares in the long run: an overview, Journal of the European Economic Association, April–May, 3(2–3):1–11

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SOURCE: EXAMPLE: if intergenerational earnings elasticity of 0.20, this means that if an individual in that country earns $10,000 less income than the average, 20 per cent of that difference (or, $2,000) will be passed on to the individual’s children. In other words, the children will earn $2,000 less than the average.

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THE GREAT GATSBY CURVE Intergenerational earnings elasticity Source: Miles Corak, (2012) Inequality from generation to generation: the United States in Comparison

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Relative Income of individuals by age Average household disposable income of two age groups (examples) relative to that of people aged 41 to 50, mid-1980s and mid-2000s OECD (2008), Growing unequal? …

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the “trade” explanation free trade has a surprising feature (discovered by Samuelson) factor prices (i.e.: the wage in a country) do not depend directly on national factor endowments. Instead, factor prices depend on good prices, and these are in turn determined in the world market.

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1 the available quantities (“endowments”) of primary factors of production, such as labor (or types of labor), capital, and land, whose abundance or scarcity would, in the absence of trade, determine their factor prices, including the wage of labor

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2 with trade, these factor endowments determine instead the comparative advantages of different countries, and thus their trade patterns (H-O) (Canada exports timber to USA because of its endowments of big woods)

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2 (cont.) Trade has a first direct consequence: Traded goods will have the same price (convergence in good prices)

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3 Factor price equalization theorem: under free trade, if countries share the same technologies and face the same international prices of traded goods, then they will also have the same prices of factors

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When countries exchange goods, in reality they are (indirectly) exchanging factors of production If a country A exports goods whose production is intensive of factor Ls, and it imports goods that are intensive of factor Lu, it means that its exports contain more Ls (less Lu) than the imported goods. As a consequence country A is indirectly exporting Ls

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The opposite is true for country B it exports goods whose production is intensive of factor Lu, and imports goods that are intensive of factor Ls: its exports contain more Lu (less Ls) than the imported goods. As a consequence country B is indirectly exporting Lu

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From this point of view Trade in goods is trade in factors Trade leads to factor price equalization

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The importance of this for the discussion here is that it means that the demand curve for a country’s labor, when we draw it as a function of wages, is not downward sloping after all, but is instead horizontal at a level that depend on prices of goods

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A possible consequence of the FPE: Since the 70s poor countries began to export manufactured goods, especially goods intensive of unskilled labor They also imported, from advanced countries, goods intensive of skilled labour Many concluded that the rising inequality was a consequence of the FPE process: increase in wages of skill workers and decrease in wages of unskilled workers in rich countries

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Does this interpretation hold?

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FPE depends on some hypothesis: 1) All countries produce all goods 2) All countries share the same technologies 3) Traded goods prices should completely converge

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1 FPE should imply a rise in prices of goods with intensive of skill labor (relative to prices of goods intensive of unskilled labor). Not true?

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Weighted changes in domestic prices Source: Feenstra, Hanson, (2001), Global production sharing and rising inequality: a survey of trade and wages, Davis University This suggests that some of the industries that use most production (less skilled) workers are those with the highest price increases

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Decomposition of the Change in the Share of Employment and Wages of Non-Production Workers USA and NB: trade explanation: mainly between sectors changes tech explanation: mainly within sector changes Source: Feenstra, Hanson, (2001), Global production sharing and rising inequality: a survey of trade and wages, Davis University

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Decomposition of the change in the share of employment and wages of non-production workers, and